6. Legal form of an organization

LEGAL FORM OF A FIRM  6

New firm planners do some serious thinking about what legal form to choose for their new endevour. This means  determining  what the status of the business will be in the eyes  of the law. The choice has very important consequences.
Three legal forms ( 1. single proprietorship, 2. partnership, 3. corporation) are available  to small firms. In all cases , all three choices should be looked at carefully. Some of the factors that should affect  the decision include plans for expansion, product or service being sold, needs for raising capital now and in subsequent years, liability  characteristics of the planned firm, the proprietor’s  available  investment funds, need for continued life of the firm, alternatives for bringing desired people into the firm,  and legal requirements of the particular locality.
The s o l e   p r o p r  ie t o r s h ip is a business owned and operated by one person. The owner and the business are synonymous in the eyes of the law. All assets in the firm are owned by the proprietor, subject only to the liabilities  incurred in its establishment and operation.  The proprietor is solely responsible for all personal and business debts and any losses incurred,  assumes all the firm ’s risks, provides most of its capital, and provides its total management. The only requirement for its establishment is that the owner obtain any licenses required  by the city,  state and start  operations.
The proprietorship form has several advantages, such as: 1. simplicity of organization, 2.owner’s freedom to make all decisions, 3. owner’s enjoyment of all profits, 4. minimum legal restrictions,  5. ease of discontinuance,  6. tax advantages.
Disadvantages of the sole proprietorship: 1. owner’s possible lack of abililty and experience, 2. limited opportunity for employees, 3. difficulty in raising capital, 4. limited life of the firm, 5. unlimited liability of proprietor.
The p a r t n e r s h ip  is usually defined  as an association of two or more persons to carry on as co-owners of a business for profit. Partnerships are based upon a partnership agreement, also known as Articles of Copartnership. Without a written agreement, the partnership does not really exist. Many circumstances arise which  cannot be foreseen and therefore must be anticipated. It should  cover all areas of possible disagreement among the partners. It should define the authority and the rights and duties of each partner, and the limits to such authority.  It should include an agreement on how  profits and losses are to be divided. Partners may make special arrangements to pay members of the firm  for services rendered, interest on capital investment, time spent, or advance drawings before the balance of profits is to be divided in an agreed ratio.

Advantages of the partnership: 1. ease of organization, 2. combined talents, judgment, and skills,  3. larger capital  available to the firm, 4. maximization of personal interest in the firm, 5. definite legal status of the firm, 6 . tax advantages.
Disadvantages of the partnership: 1. unlimited liability, 2. limited life, 3. divided  authority, 4. danger of disagreement.
The c o r p o r a t io n  is an association of stockholders( part owners), formed wi9th government consent  and having the power to transact  business in the same manner as if it were one person. A corporation has the same right as an individual to own property, conduct business,  make contacts, sue, and be sued. A corporation is a single entity ( an individual person) in the eyes of the law.
Corporations are either closed or public. A small business  corporation is usually  a closed corporation. This means that capital stock is not sold to the public. If one of the stockholders decides to sell stock, it is usually  sold to one of the stockholders or to someone of whom they all approve. In this way, the ownership of the business is selective and controlled.
A public or open corporation offers its stock to the public. This means that its stock is available to anyone who wants to buy it. The principal owner of a public corporation is the majority  stockholder.
 Advantages of the corporation: 1. limited liability, 2. variety of skills, abilities, and ideas. 3. easy  transfer of ownership, 4. ease of expansion, 5. unlimited existence, 6. applicability for both large and small firms.

Disadvantages of the corporation: 1. government regulation, 2 profit sharing, 3.complexity and high cost, 4. lack of freedom of action, 5. taxes.